Hou Wey Fook
chief investment officer,
DBS Bank
We are overweight on Asia ex-Japan for 2023. With China re-opening its borders and pivoting away from its strict zero-Covid stance, it is clear there will be more tailwinds in the Chinese economy’s sails moving forward. The lifting of citywide lockdowns will increase domestic consumption, and the reopening of China’s borders will boost tourism-related sectors. Additionally, the Chinese government’s renewed focus on quality growth has seen the enactment of supportive policies and a more accommodating stance towards real estate and big tech, which should further augment growth prospects. With current valuations sitting at attractive levels, we stay constructive on domestic-oriented sectors which are at the forefront of the reopening ripple. These include A-shares, New Economy and e-commerce platforms, China consumer brands, beneficiaries of government fixed-asset expenditures, and high dividend-yielding financials.
Our outlook for Asean is positive as well, buoyed by private consumption and tourism revivals. Asean will remain resilient despite the global economic slowdown in 2023. On the tourism front, we expect Thailand to outperform as strong momentum in arrivals is set to continue in 2023, especially in light of China’s reopening. In addition to the tourism sector, we believe Asean banks will also do well, given the rising rate environment – lower provisions, higher fee income, and re-pricing of loans such as fixed-rate mortgages could all prompt earnings surprises on the upside. We also favour Singapore Reits for their attractive dividend yields and ability to pass on cost increases through positive rental reversions.
From a risk perspective, a lot is riding on the successful implementation of reopening strategies by the Chinese authorities. However, given that they have stayed committed to reopening thus far, the probability of a successful reopening is high.
For fixed income, credit sentiment in Asia will certainly be impacted positively by China’s reopening. But investors are still advised to remain cautious given that (a) prior economic reopenings in other regions were often met with challenges to medical capacity constraints, and (b) potential lagged effects of the property crisis in 2022. Against this volatile environment we maintain a bias for high-quality investment-grade (IG) credit in Asia. Loss avoidance is key to outperformance in a credit portfolio.
After a series of aggressive rate hikes last year, we expect more restraint in the Fed’s pace of hiking in 2023 since inflation is finally showing signs of abating. This is supportive for global fixed income as yields are at historically high levels, and moderation in bond yields would provide a floor on the extent to which bond prices will fall. For example, Asia ex-Japan USD IG bonds now yield around 5 to 6 per cent, significantly above the 10-year historical average of 3.4 per cent and offer both income generation and the potential for capital appreciation as yields normalise. On a minor note, Asian USD credit also stands to benefit from softening of the USD as US rate hikes moderate. A strengthening of domestic currencies would support external debt affordability among Asian issuers.
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Ken Peng
head of Asia investment strategy,
Citi Global Wealth Investments
We believe Asia stands out globally, as China’s reopening could offset the global slowdown and support regional growth.
We see three key themes for regional equities in 2023: capturing broader China reopening; curbing exposure to US/EU demand; and investing in supply chain diversification under the G2 polarisation.
Investors should focus on countries that are more resilient and better positioned to capture the tailwinds from China’s path to recovery and self-sufficiency. We seek exposure to recovery in China and Hong Kong, with initial focus on reopening beneficiaries, followed by industries that have policy support. We favour sectors such as financials, consumer discretionary, IT (core tech) and telecoms.
We are overweight China equities and are neutral for the other markets. In the near term, China’s economy is likely to rebound sharply while the rest of the world is still likely to slow down. This divergence is likely to sustain Chinese equity outperformance. We expect 15 per cent earnings growth and a rerating of stocks back to a 13 times price earnings (PE) this year. These conservative assumptions suggest a further 20 to 30 per cent gain in share prices is possible in 2023.
One key beneficiary of China’s reopening is likely to be South-east Asia. The resumption of outbound Chinese tourism can help to extend recovery in markets like Thailand, where tourism recovered to 50 per cent of 2019 levels without Chinese travel resumption. As at mid-January, overall travel bookings of mainland Chinese tourists to South-east Asian countries surged tenfold compared with the same period last year. Flight bookings from mainland China to South-east Asia increased by 864 per cent year on year, and the most popular destinations include Thailand, Singapore, Malaysia, Cambodia, and Indonesia.
In fixed income, we see a more favourable backdrop. Investors should lock in high rates in Asian IG USD bonds. Real estate can also offer potential tactical outperformance if policies enable a rebound in sales and cash flows. As the USD starts to weaken, we believe there will be more capital inflows into Asian local currency fixed income. We favour higher-rated financials, energy, materials and tech/telecom.
In currencies, we see a substantial reversal of the USD in 2023, as market focus for the Fed has turned from how much it would hike rates to when it might cut, and US growth and inflation are already showing signs of slowing.
This creates investment opportunities in Asian currencies, and 2022’s weakest currencies may gain the most in 2023, including the Japanese yen, Australian dollar and Chinese yuan.
A narrowing monetary policy divergence will help the Japanese yen recover from its sharp 2022 depreciation. The yuan and Australian dollar are likely to appreciate notably as China reopens and sentiment is restored. The Sing dollar is likely to hold up well as the Monetary Authority of Singapore continues to maintain a hawkish stance in containing inflation.
Steve Brice
chief investment officer,
Standard Chartered Bank’s wealth management unit
We believe Asian assets in general will outperform in 2023. There are three key drivers of this expectation. First, we expect China’s economy to expand by over 5 per cent in 2023 following a 3 per cent growth in 2022. Easing mobility restrictions should help generate a sharp rebound in consumer spending. Meanwhile, the gradual easing in regulatory environment, especially in the property and Internet sectors, should help mitigate the headwinds faced by the economy and spur business investment to some degree. These factors should more than outweigh the headwinds from recessions in the US and Europe. This positive economic outlook should boost corporate earnings and cashflow generation.
Second, despite the recovery already seen so far this year, valuations are not stretched either relative to their historical averages or relative to other regions. Therefore, we see scope for the rally to run further in the coming months.
Finally, we expect the USD to weaken through the course of 2023 from peak valuations as it becomes clear that the Fed has tightened policy too much. Historically, Asian assets usually outperform in periods when the USD is weak.
For equities, that outperformance is already starting to shine through, but we believe this still has further to play out and attach an 80 per cent probability to outperformance through 2023, especially given the growth headwinds in the developed world.
Within Asia, China equities account for roughly 40 per cent of the MSCI AC Asia ex-Japan index. We expect China to drive the region’s equity market outperformance this year. We favour a balanced exposure to both China onshore equities (A-shares) and offshore equities (including Hong Kong-listed H-shares and US-listed ADRs). A-shares are likely to benefit the most from mainland China’s domestic economic recovery. We expect further policy support measures for key industries, such as the property sector, in the coming months as the government aims to accelerate economic growth.
We also see a scope for the ongoing rally in China’s offshore equities to be sustained. In recent years, global fund managers have been underweight China offshore equities relative to the benchmark partly due to policy uncertainty and geopolitical tensions. China‘s coordinated policy stimulus measures over the past few months have eased policy uncertainty significantly, while geopolitical tensions have also eased to some extent. We expect strong international fund inflows into China and Hong Kong equity markets in the coming year as global fund managers reduce their current underweight, enticed by the market’s relatively inexpensive valuations.
For bonds, while the decline in US government bond yields has led to positive returns for Asia USD bonds in the early part of the year, they still have a yield of over 6 per cent. For an asset class that is over 85 per cent investment grade and where the headwinds for property developers are easing somewhat, we see this as attractive relative to bond asset classes elsewhere in the world. We see a 70 per cent probability that Asian USD bonds will outperform in 2023.
Jean Chia
chief investment officer and head of portfolio management and research office, Bank of Singapore
Overall, we hold an overweight position in Asia ex-Japan equities, which we upgraded from neutral going into 2023. We are positive on Hong Kong and China equities, as China is poised to be the only major economy in 2023 to post improved GDP growth. The rally in China and Hong Kong equities over the last two months reflects a sharp increase in net inflows to its highest levels in recent history, reversing from the outflows just two months ago.
China is normalising rapidly after easing zero-Covid curbs. Since the authorities made an abrupt policy reversal in November 2022, public health officials have estimated that over 80 per cent of the population has been infected, achieving herd immunity. By ripping off the band-aid, the activity and mobility data in China has rebounded more sharply versus other economies like India and South Korea that eased Covid curbs last year. After a stronger than anticipated GDP growth in December 2022, we recently raised our forecast for China’s 2023 GDP growth from 4.5 to 5.2 per cent. All provincial governments have recently announced their growth targets for 2023, and more than two thirds have set their targets above 5 per cent, including the four provinces with the highest GDP.
Leading indicators of corporate profitability, such as manager surveys, are turning positive, and broadly signal an inflection point for earnings for Chinese companies. Taiwan, South Korea and Singapore should be beneficiaries of an upswing in China’s business cycle.
We see odds for further upside surprises ahead. More pro-growth policy signals can be expected at the upcoming “Two Sessions” in early March, when authorities will announce the official growth targets for the economy and total social financing. We expect a broadly supportive stance across fiscal and industrial policies to reboot growth in 2023. It is also anticipated that there will be more detailed policies that follow up on the key priorities announced at the Central Economic Work Conference last year.
All considered, we believe that the stage is set for a sustainable bull market in Hong Kong and China equities in 2023. In particular, we favour sectors such as consumer, technology, renewables, green infrastructure, and electric vehicles. We also believe that China’s Internet and platform stocks have gone through a significant down-cycle over the past two years and should emerge in 2023 with more favourable revenues and earnings, given the improvement in consumption prospects ahead. Still, intermittent bouts of profit taking and consolidation should not be surprising, while risks such as those related to volatile US-China tensions could also result in choppiness in the market.
The economic outlook will remain challenging in 2023. Rapid interest rate hikes from 2022, decades-high inflation, the energy shock from the war in Ukraine and the last vestiges of the pandemic are set to cause global growth to fall to recessionary levels.
Against this backdrop, we believe investors should focus on quality companies that possess resilient business models, robust balance sheets, high returns on capital, strong cash flows and healthy margins.
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